UK: "No Action" Clauses In Bond Issues

Last Updated: 2 July 2009
Article by Edward Davis and Sue Millar

In Elektrim S.A. v Vivendi Holdings 1 Corp: Law Debenture Trust Corporation Plc v Vivendi Holdings 1 Corp [2008] EWCA Civ 1178, the Court of Appeal considered the effect of a "no action" clause in a trust deed upon proceedings commenced by one of the bondholders in Florida.

A dispute arose in respect of whether a "no action" clause in documentation in respect of a bond issue could found an injunction restraining foreign proceedings brought by one of the bondholders, Vivendi Holdings 1 Corp ("VH1") against the trustee, Law Debenture Trust Corporation Plc (the "Trustee"), and the guarantor of the issuer's obligations, Elektrim S.A. ("Elektrim").

The "no action" clause (clause 10 of the trust deed, which was governed by English law) provided that only the Trustee was entitled to take enforcement action against the issuer and that, accordingly, bondholders could not proceed directly against the issuer unless the Trustee failed to take action in accordance with the bond documentation. A similar clause appeared in the bond conditions.

On 1 June 2007, VH1 commenced proceedings in Florida against Elektrim and the Trustee in respect of losses arising from the non-payment by Elektrim of a contingent payment (or "equity kicker") that it was obliged to pay to the bondholders. The claim alleged, amongst other things, fraud (the fraud claim against the Trustee was subsequently dropped) and also breach of fiduciary duty and negligence by the Trustee.

On 7 June 2007, Elektrim applied to the English Courts for a declaration that VH1's commencement of proceedings in Florida was in breach of the "no action" clause and also for an injunction preventing VH1 from continuing the Florida proceedings. The Judge at first instance, Mr Justice Lewison, granted the injunction. VH1 appealed.

VH1 argued that the "no action" clause did not apply to the Florida proceedings as VH1's claim in Florida was not a claim under the contract to which the clause related; the clause could not be used to restrain a claim in fraud, a Florida law tort, in Florida. The "no action" clause was, it said, confined to contractual claims under the trust deed.

The Court of Appeal, however, found that the "no action" clause applied to claims which were, in substance, claims to enforce the trust deed and that it could apply to tortious claims as well as to purely contractual claims. The Court considered the purpose of the clause, which was to ensure that bondholders acted, as a class, through the Trustee and did not pursue individual claims in respect of the bonds which were, in substance, class claims.

The Court viewed the non-payment of the "equity kicker" by Elektrim as the loss to bondholders of a contractual benefit, and any fraud connected with this benefit as a fraud against the entire class of bondholders. The object of VH1's claim, albeit framed as an individual claim in tort, was in essence to obtain compensation in respect of the loss of a contractual entitlement conferred upon VH1 by virtue of it being a bondholder. VH1's claims in Florida were deemed to be a "mirror image" of the contractual claim potentially available to the bondholders as a class (which would need to be brought through the Trustee) for breach of the trust deed, both the alleged wrongful acts and the alleged loss being identical. The Court held that the injunction had been properly granted in light of the terms of the "no action" clause. VH1's appeal was thus dismissed.

At first instance, Mr Justice Lewison had also said that, even if the "no action" clause had not applied, he would have granted Elektrim's application for an anti-suit injunction against VH1 on the general discretionary ground of vexation/oppression. Indeed, in separate Part 8 proceedings brought before the same Judge by the Trustee, the Judge had granted an injunction against VH1, in favour of the Trustee, on this ground. The Court of Appeal considered that Mr Justice Lewison had been fully entitled to consider the weakness, and inherent implausibility, of the claim in Florida and to exercise his discretion accordingly. On this basis, the Court agreed that an injunction in favour of Elektrim on the general discretionary ground of vexation/oppression would have been appropriate even if the "no action" clause had not applied.

VH1 also applied to the Court of Appeal for permission to appeal against the injunction granted in favour of the Trustee in the separate Part 8 proceedings. VH1 argued that, whatever the weaknesses of its claims in the Florida proceedings, Mr Justice Lewison, in exercising his discretion, was not entitled to go as far as to decide summarily that VH1's claims in Florida were hopeless. The Court of Appeal dismissed this application as the Court was not persuaded that there was any prospect of a successful appeal from the Judge's exercise of discretion in granting the injunction. The Court agreed that the claim by VH1 in the Florida proceedings was hopeless and that the injunction was also justified in order to protect the jurisdiction of the English Courts as VH1 should have brought its claim against the Trustee within the Part 8 proceedings brought by the Trustee in respect of the same issue.

The Court noted that VH1 and its parent company, Vivendi Universal S.A., may have genuine grievances in respect of losses arising out of their relationship with Elektrim, but stated that the Florida action was a misconceived method of pursuing those grievances.

Practical implications

This decision is perhaps not surprising. The Court of Appeal took into account the purpose of the provisions of the bond documentation, which provided that bondholders should act, as a class, through the Trustee and could not pursue individual claims against the issuer unless the Trustee failed to take action as directed by the bondholders. The Court gave the "no action" clause a wide interpretation so as to uphold this intended arrangement and to prevent individual bondholders from disrupting the arrangement by bringing individual claims.

This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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